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To: kormac who wrote (78166)	11/8/2000 2:08:27 AM
From: kormac	Respond to of 95453

Saudi Arabia plans a range of economic reforms to boost GDP growth and generate employment for its rapidly growing population. Measures include efforts to join the World Trade Organization and to attract private capital. Proposed reforms make practical sense and if implemented are likely to produce gains in efficiency, but resolving the economy's biggest problems will take more political will than the government has shown. Analysis Despite its massive oil resources, Saudi Arabia has seen per capita income slide by roughly three-quarters since the early 1980s, when living standards compared to those in the United States and Western Europe. Today, real per capita income probably is under $7,000. The fall reflects rapid population growth and the weakening of OPEC's leverage over world oil prices, which fell sharply in the late 1980s and again in the late 1990s. The population has soared over the past twenty years, from an estimated 9 million in 1980 to over 20 million in 1998. According to World Bank figures, the estimated growth rate during this period averaged 4.4 percent. Dependence on oil exports which generate enormous revenues, but few jobs has also made it difficult to keep the growing work force employed. Real unemployment for Saudi males likely average between 25 percent and 30 percent. Low crude prices have undermined the government's traditional strategy of soaking up unemployment in the state sector through job creation. At the same time, a steady supply of low-paid foreign labor from Asia and the Middle East has made it unattractive for private firms to hire Saudi nationals. Crown Prince Abdallah -- the kingdom's de facto ruler since a stroke incapacitated his brother, King Fahd -- has shown support for market-based economic reform as a solution to the country's employment problems. Saudi membership in the World Trade Organization is an important component of Abdallah's strategy. That may prove a weakness as well as a strength. ______________________________________________________________ I would like to subscribe right now! stratfor.com ____________________________________________________________ Saudi negotiations with the WTO have been underway since the early 1990s, but only last year the government began systematically addressing structural issues of accession. In August 1999, Abdullah established a Supreme Economic Council and charged it with preparing the country's institutions for WTO membership, expanding the nonstate sector of the economy and reducing Saudi Arabia's reliance on foreign workers. The WTO process is moving slowly, which reflects the need to achieve consensus within the ruling family and caution about Saudi Arabia's tightly controlled interface with the outside world. By October 2000, Riyadh had completed bilateral talks with ten current WTO members, with Japan the only major economy among them. Accession is unlikely within the next year since it will require drawn-out negotiations with the United States and the European Union. At first glance, joining the WTO seems a barely relevant goal. WTO rules do not govern trade in crude oil. Since the country exports only crude oil and petroleum products, WTO membership will do little to open foreign markets to Saudi goods. The Supreme Economic Council has identified legal reform as one of its main tasks, hoping a more transparent and predictable legal system will attract investment from foreign companies and the huge pool of Saudi capital now stashed overseas. The investment opportunities Saudi Arabia has to offer beyond oil which is likely to remain state-controlled are unclear. The real benefit of Saudi WTO membership may flow from forcing the government to undertake sensible domestic reforms that vested interests or inertia have blocked. Tighter rules on farm trade, for example, could shut down most of the country's inefficient agricultural sector, which saw explosive growth in the 1970s and 1980s based on heavy subsidies. Agriculture now accounts for 6 percent of GNP, yet the kingdom remains an importer of food and most of the labor force in this sector is foreign. ________________________________________________________ I would like to subscribe right now! stratfor.com ________________________________________________________ Improved efficiency and a better business climate may raise living standards, but these are marginal issues. The country's most serious economic problems involve fiscal and budget policy, not trade, and WTO membership will do little to resolve them. Saudi Arabia's public-sector debt has grown to 120 percent of annual GDP. State-controlled pension funds have soaked up most government bonds issued so far, indebtedness is now growing at an unsustainable rate, and the 1999 budget deficit totaled 6.5 percent of GDP. Privatization of state assets is one option for bringing the debt burden under control. There has been some slow progress here, with the country's national airline and telecommunications system prepared for sale. But the ruling family has limited state revenues since it apparently won't sell Saudi ARAMCO, by far the most valuable asset in the state's portfolio and an enormous source of political patronage. The only alternative is much deeper reductions in government spending. Saudi Arabia has plenty of fat to cut: foreign aid has averaged an astonishing 4 percent of GDP in recent years. A large share of the country's huge military budget probably represents kickbacks on weapons contracts brokered by members of the ruling family. And massive subsidies provide generous social benefits to Saudi citizens. Tampering with these items, however, could endanger the political balance keeping the House of Saudi in power. They ensure the loyalty of the general population and thousands of minor ruling family members, who rely on government-linked dealings as a source of income. Fiscal reform, in other words, may be far more important than trade and investment reform but also much harder to implement. _____________________________________________ SUBSCRIBE to our new service. Just go to stratfor.com _______________________________________________ (c) 2000 Stratfor, Inc. _______________________________________________